Rout in US Bank Stocks Tied to EU Exposure Fears (XLF)

June 25, 2012 2:19 PM EDT
Bank stocks are trading lower Monday, with Bank of America (NYSE: BAC) and Morgan Stanly (NYSE: MS) leading the group lower. The rout in banks stocks is directly tied to increasing panic going into this week’s E.U. summit. There are also fresh fears in the market banks in America have grossly underestimated their exposure to a potential EU breakup.

Simon Johnson, former chief economist at the IMF, thinks there are huge risks to U.S. banks if the EU breaks up. In a Bloomberg article, Johnson warned risks to U.S. banks are probably greater than most are predicting. He believes the so-call stress tests on U.S. banks didn’t account for this scenario. In his view, the Swiss National Bank made the correct call when it recommended banks in Switzerland suspend dividends and raise cash in order to boost their balance sheets in preparation for an escalating crisis in the euro area.

Johnson summed up his fears in the following statement. “If the world’s largest bank [JPMorgan] can lose $2 billion to $3 billion in a relatively calm quarter through incompetence and neglect on the fringes of its operations, how much does it stand to lose when markets really turn nasty across a much broader range of its activities?”

Shares of BofA are down 4 percent to $7.62, shares of Morgan Stanley are down 4.6 percent to $13.49, Citi (NYSE: C) shares are down 4.5 percent to $26.72, shares of JPMorgan (NYSE: JPM) are down 2.3 percent, and Goldman (NYSE: GS) shares are down about 2.4 percent.

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